Hong Kong: introducing a new corporate vehicle - the open-ended fund company

The Securities and Futures (Amendment) Bill 2016 was introduced in the Legislative Council last month and considered by the House Committee. The Committee decided that a Bills Committee should be formed to consider the Bill: see here (pdf). The Bills Committee will hold its first meeting tomorrow: see here. The Bill will amend the Securities and Futures Ordinance (Cap. 571) and other legislation in order to introduce a new investment vehicle in Hong Kong: the open-ended fund company. At present it is possible to form such funds in the form of a unit trust but not in corporate form because of restrictions on the reduction of capital under the Companies Ordinance (Cap. 622). The Bill contains, amongst other things, the core framework for the incorporation and governance of such companies. A copy of the Bill, together with supporting information, is available here.

UK: the Open-Ended Investment Companies (Amendment) Regulations 2011

A draft of the Open-Ended Investment Companies (Amendment) Regulations 2011 was laid before Parliament earlier this week: see here or here (pdf). Accompanying the publication of the draft Regulations is an explanatory memorandum here (pdf) and an impact assessment (here, pdf). The purpose of the Regulations is to introduce a protected cell regime for open ended investment companies in order to ensure the segregation of liabilities of different sub funds held under the same OEIC umbrella company.

Cayman Islands: the duties of a hedge fund's non-executive directors

The Grand Court gave judgment late last month in Weavering Macro Fixed Income Fund Ltd. (in liquidation) v Peterson and Ekstrom: see here (pdf). The case concerned a claim by the liquidators of a hedge fund (formed as an open ended investment company), which was listed on the Irish Stock Exchange, against its two non-executive directors. These directors were closely related to the fund's promoter and principal investment manager. The company entered liquidation shortly after it was discovered that many of the assets on its balance sheet did not exist.

Consistent with common practice, the investment management, administration and accounting functions of the fund had been delegated to professional service providers. The role of the non-executive directors was to perform a supervisory function. The liquidators argued that the directors had failed in this regard and had breached their duty of skill, care and diligence; the losses suffered by the fund, it was argued, arose because of their neglect. The liquidators were successful in their claim against the directors. The trial judge found that the directors had, amongst other things, assumed the "posture of automatons" by signing whatever documents were put in front of them by the investment manager and made no attempt to understand exactly how each of the service providers intended to perform its duties.

The judgment contains much about the standards expected of the non-executive directors under the law of the Cayman Islands, and there are many references to decisions of the English courts. For example, the judge held that the the scope of the directors' duties was not reduced because they were unpaid and received no expenses. The judge also explained what he expected of the directors in terms of the conduct of board meetings and the matters that the directors should have discussed. He criticised the production of standard form minutes for meetings. The directors of investment funds, he observed, had a duty to ensure that minutes of meetings were taken which enable the reader to understand the basis on which decisions were taken. Moreover, not once in six years did the directors ask for a written report, or receive an oral report, from those they were required to supervise.

UK: consultation on introducing a protected cell regime for OEICs - Law Society response

Earlier this year HM Treasury published a consultation paper containing proposals for the introduction of a protected cell regime for open-ended investment companies (OEICs). The Law Society has published its response, in which it states:

We welcome the Government’s intention to proceed to implement a protected cell regime for OEICs. We are, however, disappointed with the way in which the Government proposes to implement its proposal. We believe that the proposals are flawed and will create uncertainty".

UK: introducing a protected cell regime for OEICs - HM Treasury consultation

HM Treasury have published a consultation paper containing proposals for the introduction of a protected cell regime for open-ended investment companies (OEICs). These changes were suggested in 2007 in a consultation on better regulation measures for the asset management sector. In the consultation paper published this week, which contains a draft of the Open-Ended Investment Companies (Amendment) (No. 2) Regulations 2009, HM Treasury explains (paras. 2.1 and 2.1): 

OEICs are investment funds structured as bodies corporate. Large fund managers generally operate a small number of OEIC umbrella companies with a large number of sub-funds within each umbrella, allowing them to operate a large range of funds more efficiently. The sub-funds do not have a separate legal personality, but are separately managed, charged, accounted for and assessed for tax. Under current law there is no segregation of liabilities between different sub-funds. For example, if an umbrella fund contained one cautious UK bond fund and one high-risk Far-east equity fund and the Far-East equity fund collapsed with liabilities exceeding its assets, creditors could have a claim on the assets of the UK bond fund. Investors in the cautious fund therefore bear some of the risk of the riskier fund.

In practice the probability of an OEIC collapse is small, as OEICs must comply with borrowing limits imposed by the FSA, but not zero. Current FSA rules require disclosure of the contagion risk in the fund prospectus and periodic reports, although there is a danger that some OEIC investors do not fully understand it. Thus, provided adequate protection of existing creditors can also be achieved, segregating liabilities so that the liabilities of any one sub-fund could only be met out of the assets of that sub-fund appeared desirable".